Understanding “Opportunity Cost”

Not understanding “opportunity cost” could be costing you bundles of money.

We have ancient sayings around the concept of opportunity. We say, “opportunity knocks.” And, we get excited by an “opportunity of a lifetime.”

In addition, of course, “when one door closes another one opens” is a favorite way of offsetting a disappointing loss and creating hope for an opportunity in the future.

You have likely lost many opportunities. Maybe you didn’t see the email in time to get in on a sale or didn’t sign up in time for an event that sold out. However, that’s not opportunity cost. Opportunity cost is quite different.

Opportunity Cost Defined

Opportunity Cost is a benefit that one might receive but chooses to give up to pursue another course of action.

In other words, if you decide to pursue a project and it results in less income versus another plan or project, that is an “opportunity cost”. Said another way, if your decision ends up costing you an opportunity to do something that might have made you more money, that represents lost income opportunity. Your decision has effectively “cost” you opportunities to make more money during that same time period. Moreover, once it is lost, you cannot regain that value or make up for the lost benefits.

That’s the opportunity cost issue. Sales, research and development, production, expansion, and marketing all have costs and must be measured against the short-term and long-term benefits and profit potentials. It’s the only way to really know if you are making a proper investment in your time and/or money.

There are so many conundrums facing small business owners every day! For example: should you buy new equipment, to increase your production or spend that money on Facebook ads? This assumes you don’t have money in your budget to do both, of course. Money is often more finite than time!

When choosing to invest money in project A instead of B it comes down to the infamous cost/benefit analysis that we often just try to ignore. Especially if we are not sure how to do the full measurements of the costs/benefits to start with.

There is a formula that can help with the decision, but it’s not fool-proof:

Opportunity cost is typically defined in terms of money, but it may also be considered in terms of time, person-hours, mechanical output, or any other finite resource. But in all cases, it means you are measuring your results and comparing the two options.

Here’s the Tricky Part

Perhaps you have chosen to do a commission that will take twice as long to do compared to your normal creative endeavors. Said another way, you could create two pieces in the time it will take to do the one on a commission.

To make it more confusing, let’s say that you can only charge a 50% higher price premium for commissions. In simple math, let’s imagine each normal item sells for $100, so creating two would potentially bring you $200 gross income. The commission item – created in the same amount of time – will bring you $150. It would appear that your time is better spent avoiding commissions. But of course, it’s never that obvious, is it?

The monkey-in-the-wrench is the guaranteed ROI, or Return on Investment. This is a complex assessment because the commission is a “sure thing”. When complete, you get paid. Meanwhile, the sales of the two pieces you would have created instead of the commission might take months to sell. This is especially true if you are not selling wholesale to retail stores and/or consigning to shops or galleries. If you are selling one-to-one online or at retail art shows, every piece you make has a risk of taking months to find a home. Or perhaps never finding a home. (We won’t even go into the “cost” to your confidence when something you have created never gets appreciated and adopted!)

I think the above example shows that it’s not always cut and dried as to which of the two options will be worth more to your business. However, the more you pay attention to the actual costs, the more you can begin to make better decisions.

If you were to spend your time doing A and B was a more guaranteed income or more lucrative, why do A? For example, what if you can hire someone to come and watch your kids for a couple of hours after school while you make profits that will cover that expense and MORE. This would seem to be an obvious choice.

Bottom line is: time is not replaceable and time is money.

For example, have you ever really looked at all the time it takes to do a week-end art show? It might be more useful to do things like researching stores and galleries that would be a good fit for your art. Or maybe you should create mailing pieces that you can send to retailers to introduce your line. Of course it’s always “time well spent” when following-up on inquiries to create new accounts or get reorders from current wholesale buyers.

You could do any of the above and likely have a better long-term profit versus doing that retail art fair that has a monster booth fee, takes days to prepare for and days to recover from, AND has a high risk of bad weather every year.

Heck, if you have been a good little marketing machine, you will have a list of retail buyers from past shows and can email them and let them know that you are not doing the “Finger’s Crossed for Good Weather Art Fair” this year and from the money you are saving, you are having a big “subscribers only” sale on your website.

Opportunity needs your respect. Don’t squander your precious time doing things that are unproductive or don’t add value to your business. It’s fine to indulge in “non-productive” activities from time to time, but sitting in front of Facebook watching cat videos is clearly not using FB as a tool for growing your sales. Don’t fool yourself into thinking that you are helping your business by doing things that you know will never add to your success or profits.

You can never get time back, nor can it be banked for future use. Mis-use of your time, along with money, is an opportunity cost that will keep you from being successful and thriving in your art business.

Not sure what you mean by “on-line media”, but yes… it’s a powerful tool. Email marketing is still the strongest way to get sales. Using a professional program like Constant Contact (or others), you have a way to stay relevant and remembered. Offering people (at an art fair or on your website) a “subscriber special instant discount” is an emailing 101 method of securing more sign-ups.

To learn how to really become an expert at using email marketing in your art businesses, I recommend you grab the publication I co-wrote with Carolyn Edlund of Artsy Shark: The Artsy Shark Success Guide to Email Marketing for Artists It’s 160 pages – 12 white papers – 6 videos – and truly a game changer.

McKenna
on July 13, 2017 at 9:33 am

I had an anonymous entry via my email. I think this is valuable. So with permission I am relaying some of the comments this person submitted to me directly:

“HI Mckenna,
I think you’ve hit on a really critical issue here. So many artists I meet are taking up opportunities that will have no financial benefit to them or any other benefit that will build long term success. I often hear rationalizations about fairs along the lines of “I’m glad I took part… I covered my costs”. Similarly, many are using exhibition opportunities that are “good exposure” but have costs that far exceed the exposure with more in time and effort than they get out of it.

It seems a bit harsh but many artists are indulging in an expensive hobby rather than planning a financially stable future for themselves.” End of Quote

I must add: This is an issue I deal with all the time in my consultations with Artists. If you feel lost in the weeds, if you feel like you are lacking direction and a plan for success, I invite you to indulge in a free 30 min. consultation. Let’s sow some productive seeds and overtake the rudderless fields of weeds.

This is so true – I think we’re easily distracted by “opportunities” that pop into our in-box. I read somewhere that you need to have a burning “yes” inside in order to say “no” to a lot of things people ask you to do. A clear business plan is a good start. Sticking to it and propelling it forward is the really hard part. Help from an adviser like yourself will impart both direction and enthusiasm! Sometimes you just can’t see clearly by yourself…

McKenna
on July 13, 2017 at 11:22 am

Oh my…. learning to say “no” is a HUGE piece of the learning curve to be successful. Thanks for contributing as always, Rebecca.

Interesting read,Mckenna. I still like to support my local art leagues,but I have walked away from some of their local shows. It seems the only attendees are the other artists! Great for social interaction, but not for generating sales. I never was too interested in the art fair circuit for many of the reasons you have mentioned. It is a tremendous amount of work for the time invested. Thanks!

It’s tough sometimes. We think we “might” make money, right? But if you do some math and see ALL the time that is “used up” just in preparing and put a value on your time, then it’s easier to just say “no”. It’s time you lose forever. You never get it back.

Last bigger show I did, I lost money even though I made four times the booth fee. I am not saying don’t do them, but what I am saying is be cost conscious. KNOW what you are really spending to do the show and then make sure you are getting as many email sign-ups as possible, so you can eventually not need to do more than a few “top” shows a year – still with finger’s crossed, of course.

After becoming disillusioned with 99% of what I’d been doing to sell, market & “get exposure” for my work, and not making the money I want/should have, the best thing that I ever did was to sit down and figure out exactly who is my target client/customer. I did this by looking at the characteristics of my existing clients. What an eye opener! This was something I should have done years ago. It makes it so much easier to choose the events that my type of customer will attend and will end up being profitable to me.

As always, Fiona….Excellent advice! This is especially true for someone like you with such a strong talent level and target-marketed specific work. No artist with a solid foundation in place and some history of success should just plop down in some local charity bazaar’s weekend “family fun” event. Be where YOUR collectors are going to hang out and – this is important – take you seriously.